Editorial Manager(tm) for IWA Conferences Manuscript Draft Manuscript Number: IWA-7742R1 Title: Incentivizing investments and ensuring

cost recovery for operating wastewater treatment systems in Asia Article Type: Full Paper Keywords: Cost recovery; Economic benefits; Financing; Performance monitoring; Wastewater treatment Corresponding Author: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhD Corresponding Author's Institution: First Author: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhD Order of Authors: Jonathan Neil Parkinson, B. Eng (Hons) MSc DIC PhD;Anand Chiplunkar, PhD Manuscript Region of Origin: UNITED KINGDOM

final paper for DEWATS conference Click here to download Manuscript: Motivating investments and promoting sustainability of DEWATS - submission 07.05.11.doc
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Motivating investments and promoting sustainability of DEWATS

J.N. Parkinson *, A.Chiplunkar **, I. Blackett ***

* International Water Association, Alliance House, 12 Caxton Street, London SW1H OQS (E-mail: jonathan.parkinson@iwahq.org) ** Asian Development Bank, 6 ADB Avenue, Mandaluyong City 1550, Metro Manila, Philippines (E-mail: achiplunkar@adb.org) ** Water and Sanitation Program, Indonesia Stock Exchange (BEI), Jakarta, 12190, Indonesia (E-mail: iblackett@worldbank.org)

Abstract There are considerable economic benefits associated with investments in improved sanitation and excreta management. However, existing policy frameworks are ineffective in the translating these benefits into the necessary financial incentives that are required to mobilise capital investment and to ensure financial sustainability. Bearing this in mind, the authors consider why it is proving to be so difficult to instigate any comprehensive change. To overcome the current status quo, the authors argue for a need to approach wastewater management from a more localised perspective in which standards and strategies for achieving these standards are developed in close partnership with local stakeholders using results from cost benefit analysis to support the decision-making process. The authors make the case that an important part of the process is to ensure that all economic benefits are monetized and realised at different levels. In addition, financial incentives linked to performance of wastewater treatment plant operators is considered to be key towards achieving environmental objectives. Keywords Cost benefit analysis; Cost recovery; Economic benefits; Financing; Performance monitoring; Regulation; Wastewater treatment; Water quality standards

INTRODUCTION A lack of urban sanitation coverage and systems for collection and treatment of wastewater, septage and fecal sludge is widespread throughout Asia. Even in situations where systems exist, facilities and infrastructure are frequently poorly operated and maintained. As a result, waterbodies throughout the region continue to be degraded by pollution from uncontrolled discharges of untreated wastewater arising from inadequate and incomplete urban sanitation systems. The two main impacts are those that directly affect human health as a result of transmission of waterborne diseases and those that degrade the quality of water resources and the environment. Some governments recognize the significance of these impacts and have developed policies which aim to protect the health of the populations and the water resources within the counties that they govern. However, even where such policies exist, the Asian Development Bank (ADB) and other agencies still find it challenging to get policy makers and managers at national and local government levels to translate these policies into practice and develop strategies to tackle wastewater management. A typical example comes from China where it is estimated that only 56 percent of municipal wastewater is treated, and often not to acceptable standards. As a consequence, the Hai River is the most polluted river in the PRC and more than 50 percent of surface water in the river basin is rendered unusable for any beneficial use (MEP 2010). This is not an unusual situation in China and also applies in other parts of Asia. This situation is paradoxical given the fact that there are obvious health and environmental benefits that can be achieved as a result of investments in improving coverage and waste management. Even in situations where investments have been made, the efficacy of the investments to reach the desired result is severely compromised when wastewater treatment assets are poorly operated or maintained. For example, a report by the Central Pollution Control Board (CPCB) in India revealed

that up to 39 percent of wastewater treatment facilities in the country breached environmental regulations (CPCB, 2005). In China, more than 1,000 wastewater plants were built between 2000 and 2006, but the utilization rate is only 60 percent. About 50 plants in 30 cities are operating at below 30 percent capacity, and some are left idle, mainly because of inadequate wastewater collection facilities and because revenues collected from customers are transferred to the general city budget and not used to ensure that treatment plants have the resources needed to operate. Operational efficiency is also low, mainly because plants carry out only primary treatment. Even in Shanghai the efficiency is only 1030 percent (Shalizi 2008). Additionally, there is also a lack of institutional capacity and resources in national agencies to regulate effectively; especially given the high costs incurred in establishing and maintaining effective regulatory instruments. This may be as a result of the use of inappropriate and unsustainable technologies which were installed in pursuit of aspirational standards. This situation is exacerbated by the uniformity and inflexibility of standards set by central government agencies. The fact that wastewater discharge standards in developed countries have been developed progressively as societies reached higher levels of affluence and environmental awareness is frequently overlooked (Johnstone and Horan 1996). Government monitoring and enforcement programs are having only limited impact, because of selective application of the laws and low levels of fines at the provincial and central levels, combined with weak enforcement of rules at the local level, which diminish the deterrence value of regulations. Regulations are also incomplete insofar as load-based standards are absent and the standards that are set are not achievable given Chinas current technological capabilities (Shalizi 2008). In this paper, the authors explore the economic benefits of sanitation and wastewater treatment in relation to the health benefits, reduced pollution of surface and groundwater and wastewater reuse. They consider how the economic benefits may be translated into financial incentives to provide an incentive for wastewater systems to be well operated and maintained. The applicability of centralised standards and regulation is also open to question and other more localised and incremental forms of regulation need to be considered. ECONOMICS OF SANITATION AND WASTEWATER MANAGEMENT Some studies focus on the health benefits in the household domain whilst others focus more on the benefits of wastewater treatment. The Water and Sanitation Programs (WSP) Economics of Sanitation Initiative (ESI) has looked comprehensively at both the household and public domain and, based upon this analysis, Parkinson and Blume (2010) summarize the following economic benefits: Time benefits: as a result of closer access to a toilet and shorter waiting times at public toilets (resulting in additional time for work or study), and time gains associated with caring for the sick. Health benefits: increased productivity and income; reduced expenditure on health care. Education: increased attendance at school and improved cogitative ability. Improved water quality: reduced costs of provision of water supply for drinking and other purposes, and enhanced productivity of aquatic (and to a lesser extent terrestrial) ecosystems. Environment quality: increased land value due to enhanced environmental conditions. Tourism: potential for increased revenue from tourism. These benefits can have a substantial impact on the economy as a whole which can be quantified in terms of the benefit to people whose livelihoods depend upon the quality of the environment. In this respect, although economic analysis is based on an human centred viewpoint on the value of the environment, it provides a useful way of identifying and subsequently quantifying the full range of impacts. The benefits that are not directly attributable to the proposed intervention are known as externalities. For example, these may relate to reuse of treated water which can have positive externalities related to the increase in water availability and potential savings in the use of agricultural fertilizers. The less tangible but nonetheless important economic benefits relate to aesthetics, such as when an area becomes more attractive to live and work in; thus increasing land prices and real estate.

QUANTIFICATION OF ECONOMICS BENEFITS Economic benefits that cannot be attributed directly to financial expenditures or revenue can be quantified in monetary terms and there are various methodologies that can be employed for this purpose. Cost-benefit analysis (CBA) is widely accepted as a decision-making support tool to compare the economic viability of different proposals in which benefits are compared using a common analytical methodology. Shadow pricing is a way of monetising environmental benefits in which wastewater treatment benefits are calculated as the equivalent of the environmental damage avoided. All identified benefits are translated into a common monetary language and economic viability occurs where benefits outweigh costs and the result is positive. Economic benefits of sanitation In South East Asia, the ESI study commissioned by WSP estimated that Cambodia, Indonesia, the Philippines and Vietnam (WSP (2007) lose an aggregated USD 2 billion a year in financial costs due to poor sanitation (equivalent to 0.44% of their GDP) and USD 9 billion a year in economic losses (equivalent to 2% of their combined GDP). These figure are important for advocacy purposes to lobby politicians to invest in improved sanitation. However, further analysis of the results is necessary to understand what benefits are attributed towards household level sanitation and what are attributed to investments in additional facilities and infrastructure for wastewater treatment. As an example of how these cost may be disaggregated, Table 1 shows the benefit-cost ratios and cost per disability life year averted (DALY) by intervention in urban areas in the Philippines. The results are presented for ideal settings in which it is assumed that facilities are performing according to their design and also under actual settings which takes into consideration the fact that many facilities are not well operated or maintained and therefore the actual benefit realised is lower than the design value. Table 1. Benefit-cost ratios of various types of urban sanitation in the Philippines (Rodriguez et al 2010). Note: These results are not for citation as they are draft and unpublished. Cost per disability life year averted (DALY) (ideal setting) 000 pesos Shared and communal facilities On-site sanitation (household level facilities)
Community toilets Shared toilets 131 115

Benefit-cost ratios in urban areas, by intervention

under ideal settings 2.9 2.3

under actual settings 1.7 1.3

Pour flush to pit Urine Diversion Dry Toilet Pour-flush toilets to septic tank No desludging Sludge collected and treated off-site Sewers connected to decentralized conventional treatment

126 459

5.1 1.5

3.3 1.3

430 383 434

5.1 3.8 4.3

4.1 2.7 3.6

Waterborne sanitation and wastewater treatment

The results show that all interventions show positive economic benefits which justifies the need for investment and potentially the use of targeted subsidies. The lower cost sanitation options deliver relatively high economic benefits for each unit of investment, but when actual performance is taken into account, the reduced cost-effectiveness ratios strengthen the case for off-site treatment where there is greater opportunity for greater management control and therefore improved performance. The results also show that the installation of communal and shared toilets can be a cost-effective way of reducing the transmission of diarroheal diseases as indicated by the relatively low costs per DALY averted. But these costs are observed to be relatively high (> 3000 US$), which is attributed to the relatively low rate of child mortality in the Philippines, meaning that deaths account for the major share of the DALY burden. But the DALY results do not consider the environment benefits related to waste treatment and/or reuse and providing low cost sanitation access (as in MDG) without proper disposal of wastewater or sludge still leads to degradation of environmental quality. Economic benefits of wastewater treatment and reuse The results from the WSP study in the Philippines presented above indicate either comparable or higher cost benefits of investments in waterborne sanitation and wastewater treatment relative to other investments. However, the results from other studies demonstrate that the economic benefits depend upon the type and use of the receiving water into which the wastewater is discharged. For example, Hernndez-Sancho et al (2009/2010) used CBA to assess the economic viability of various types of wastewater treatment plants (WWTPs) in Spain. The lowest relative benefit was identified to be in those situations where wastewater is discharged into the sea due to the dilution and dispersion of pollution in marine waters. The greatest environmental benefit was found to be associated with discharge into wetlands because these areas have high ecological value and are more sensitive to pollution. Interestingly, nutrient removal (in particular phosphorus) was identified to be the most cost-beneficial form of wastewater treatment; whilst treatment of suspended solids was observed to be the least environmentally beneficial action. Molinos-Senante et al (2010b) also concluded that phosphorus recovery is viable not only from sustainable development perspective but also from an economic point of view. With respect to the quality of wastewater for reuse in agriculture, Lavee (2011) analysed the implications on the costbenefit of wastewater treatment plants in Israel as a result of changes in the regulatory standards. The study showed that the introduction of stricter standards (and therefore more costly wastewater treatment plants) would result in greater net economic benefit when all the expected benefits are monetized. Haruvy (1997) compared various wastewater reclamation and reuse options in Israel looking at the implications of changes in treatment levels and location of reuse. Estimated costs include those of treatment, storage and conveyance, while benefits comprise the value of agricultural output, the decrease in fertilization costs, and aquifer recharge. Environmental impacts that were considered in the analysis related to contamination of groundwater by nitrates and resultant health risks. According to the analysis, wastewater irrigation may save US$0.50-0.60 per cubic metre of wastewater compared with river disposal in the center of Israel. Hernndez-Sancho et al (2009/2010) also looked into the economic benefits of reuse of treated wastewater. They found that the sale of treated wastewater resulted in an average net profit for the wastewater treatment and concluded that reuse offers significant economic benefits because it reduces the pressure on conventional water resources, whilst simultaneously reducing pollution of receiving water courses. BENEFITS OF MANAGEMENT DECENTRALISED APPROACHES TOWARDS WASTEWATER

Clearly there are economic benefits in investing in both toilets (household, communal and public) and systems for collecting, treating and reusing wastewater. The key question remains whether this is best achieved at the local level using decentralised systems or at a large scale using centralised systems. There is no global answer to this, as the economic viability of sanitation systems is dependent on site-specific conditions and the potential for the productive use of the waterbodies into which the residual wastes are discharged. However, given the high costs of centralised

sanitation systems, it is logical to move towards a system in which the economic benefits are realised as locally as possible. The greater the level of decentralization, the more opportunity there is to bring wastewater management down to a local level whereby the economic benefits are more effectively realised by local stakeholders. Evidently, in denser urban areas, decentralised systems become difficult to construct once developments have already used all available space. But it should not be assumed that decentralised systems cannot be installed in urban areas as there are often pockets of urban land that can be used for smaller wastewater management facilities. In these situations, the use of the land for wastewater treatment is not necessarily a technical problem, but more a socio-political decision. Setting and regulating standards for wastewater disposal As noted above, standards set by centralised agencies can be restrictive and constrain investment. This is particularly a problem for decentralised systems which are not always capable of achieving high standards, unless a three-stage treatment process is adopted. The failings of the uniform standard approach adopted by central government agencies necessitates a need to consider policies and standards that are congruous with local needs. Johnstone and Norton (2000) note that the assimilative capacity of the water body is different in different environmental settings and accordingly the standards can be linked to the intended beneficial uses. Thus, in some cases, there may be a need to introduce new or amend existing standards where unrealistic standards have already been introduced. Johnstone and Norton (2000) concluded that there is a need for a phased approach to the introduction of standards. Von Sperling (2000) describes further the benefits associated with a stepwise implementation of standards to achieve a gradual improvement of the water or wastewater quality, Even though researchers working in specific situations have shown that higher standards can result in higher economic gains and are therefore justified, this approach requires additional capital which is often lacking. Given this situation, a phased introduction of investment may be an alternative, although this too needs to be costed for the specific situation. For example, satisfying the European Unions water quality objectives for minimum dissolved oxygen is estimated to require a capital investment of about US$ 65 million, whereas a lower standard of 6 mg/l would cost US$ 26 million and a year-round minimum DO standard of 4 mg/l would cost US$ 13 million (Somlyody and Shanahan 1998). In Asia, the costs may be quite different depending upon the type of technology adopted which will impact upon the results from the CBA. CBA is also influenced by operational and maintenance costs (OPEX) but these data are scarcer. According to EPSAR (2009), the average WWTP operating costs are 0.12, 0.26 and 0.32 /m3 for primary, secondary and tertiary treatment respectively. These are only indicative as these data are specifically relevant to the Spanish context, but nonetheless illustrate the fact that different levels of treatment required considerably different levels of investment. PARTICIPATION FROM LOCAL STAKEHOLDERS One of the other key benefits of the decentralised approach is that it provides greater opportunity to involve stakeholders in the derivation of policy and standards that are appropriate for the local context. Enforcement by local stakeholders may be considered as means to regulate and to hold those responsible for pollution accountable. The development of policies to prevent the degradation and depletion of water resources requires determining their value in social and economic terms and incorporating this information into the decision-making process (Hernndez-Sancho et al 2010). Thus, as well as the catchment approach being logical from a technical perspective (i.e. to derive a pollution control strategy that is approach for local water bodies), it also make sense from the perspective of ensuring that local stakeholders are in agreement with the proposed standards and the strategy for pollution reduction in light of the costs incurred. This approach is being promoted in Brazil where implementation of the PRODES programme which was launched in 2001. PRODES requires that a river basin committee (RBC) is operative and is involved with the implementation of water charging in the basin and effluent discharge reduction

levels approved by the committee. It requires also that a social agreement is entered into between legitimate representatives of all stakeholders: the Federal Government through the Brazilian National Water Agency (ANA), the State Governments; the private sector and civil society legitimate representatives. Subsequently the RBC should agree to the investment programme via an agreement signed with the Municipal Authority. POTENTIAL FOR OUTPUT BASED FINANCING TO INCENTIVISE INVESTMENTS AND PROMOTE OPERATIONAL SUSTAINABILITY OF DEWATS The PRODES programme launched in Brazil described above involves an innovative financing facility that aims to encourage public and private companies to implement new treatment plants and to improve the performance of existing wastewater treatment systems based upon a system of financial incentives according to the monitored reduction in pollutant loads. The concept of the programme is innovative because, instead of financing civil works and equipment, it finances the implementation of new wastewater treatment plants via a series of financial instruments based upon the treatment of wastewater according to a set of predetermined standards. ANA also provides financing for expansion or retrofitting of treatment plants, provided that these are able to lead to improvements in the pollutant load removed and treatment plant efficiency. Payments are made available only after the achievement of the agreed goals on water quality indexes are demonstrated. The assessment of compliance of the treatment plant is made by ANA according to a set of rules, based on a process of self-evaluation and auditing, which specifies sampling frequency, compliance percentage and other criteria. Oliveira et al (2007) argue that this approach has considerable potential as part of a comprehensive pollution mitigation strategy. This approach may have potential for application in Asia, but success is dependent on the development of a standardised framework of performance evaluation for regulatory purposes. CONCLUDING REMARKS In contrast to water supply and sanitation services, the benefits of wastewater treatment are less obvious to individuals and also more difficult to assess in monetary terms. Although wastewater treatment has many associated environmental benefits, these are often not calculated because they are not set by the market (Molinos-Senante et al 2010a). There is however an increasing body of evidence that indicates that wastewater treatment is economically viable but this depends on the full range of environmental benefits being included in the analysis. In general, studies show that more complete and advanced systems that achieve higher standards of environmental health are also more cost-beneficial per unit of investment. There are however more costly and therefore require greater levels of investment as well as more advanced systems for operation and maintenance. Therefore, the two main constraints are access to finance and development of technical and managerial capacity to be able to operate and maintain wastewater systems. Underlying both of these constraints is the lack of political incentive to invest in the first place and lack of incentive from an operational perspective to ensure that systems are well operated. The results from financial and economic analysis can play a key role in advocacy to politicians that investing in sanitation and wastewater management systems is cost-beneficial and does not necessary result in an ongoing drain in financial resources if local stakeholders sign up to a policy that is perceived to result in environmental health improvements that will benefit the local community. Identifying the appropriate standards is key in this process as they need to be congruous with these demands and the local context. There is therefore a need to develop and apply methodologies for economic analysis that can be used to support decision-making and policy development at the local level rather than using the results from other studies to make generic conclusions about the applicability of specific technologies. Central governmental regulatory agencies should embrace these contemporary approaches and consider how they make work effectively with local authorities to support decisionmaking and policy development at the local level. These approaches are envisaged to have greater potential for achieve more widespread and long-term improvements in sanitation and wastewater management than are currently achieved.

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